Tuesday, March 16, 2010

Brazil is set to Increase Tariffs on Cotton

In a dispute with the US, Brazil has decided to raise import tariffs on cotton. The dispute revolves around the US subsidizing cotton production here in the US, and in an effort to solve this dispute between the two nations, Brazil is threatening to raise the tariff on imported US cotton.

As an economist, I am not in favor of tariffs, since as I show in Prin. of Micro - tariffs reduce economic welfare. Yet in this case, if the threat of increasing tariffs on imported US cotton products gets the US to reduce the cotton subsidy or make other concessions in the trade of cotton, then using the threat of increasing tariffs is actually beneficial. The problem is that for the threat to have any value, the US has to believe that Brazil will actually go through with increasing the imported cotton tariff, and that is welfare reducing.

Likewise, as an economist, I am not in favor of subsidies. As we saw recently, subsidies in the solar power industry resulted in significant negative economic effects, and just like taxes, subsidies are welfare reducing. So if the US reduces (or eliminates the cotton subsidies) and Brazil does not increase the import tariff - this is a win-win situation in terms of economic welfare in both nations.

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